Thursday, September 08, 2011
9:42:52 PM EDT

Uncle Ben Disappoints, Again

by
Jim Brown

Ben Bernanke spoke again today on the state of the economy but his speech was a carbon copy of the Jackson Hole speech two weeks ago and still no promise any specific stimulus program.

Market Statistics

Traders had been expecting Bernanke to further elaborate on what types of stimulus the Fed might be considering. Instead of discussing individual options Bernanke simply reiterated his closing comments from Jackson Hole.

The Fed will consider additional stimulus.

The Fed will employ tools as appropriate.

The Fed will do "all it can" to restore growth and jobs.

The key word in all those statements is "will" as opposed to could or might. The "all it can" is also a clue that suggests there is more the Fed will do since there are still stimulus options available.

The markets were hoping for more specificity. Unfortunately Bernanke was speaking only several hours before president Obama's speech on jobs to the joint session of Congress. I am sure he did not want to say anything ahead of that speech that could be in contradiction to something the president may propose. It is not politically correct to upstage your boss. After the president's proposals are announced the Fed will have two weeks before the September 20th meeting to determine what impact, if any, those proposals will have on the economy and how best to act in light of those plans.

The market was hoping for more although that hope was irrational. Anybody thinking the situation through would understand the potential for any actionable clues was minimal.

He did spend a lot of time downplaying expectations on inflation. That is another clue to the Fed's plans. If he can convince the committee that inflation is less of a problem then they will be more likely to agree to further stimulus.

The market did not get a lot of help from today's economics. The weekly jobless claims rose unexpectedly to 414,000 compared to the consensus for a decline to 405,000. Claims in the prior week were revised higher by +3,000 to 412,000.

This was a throw away week because of the holiday. Many newly unemployed workers would have waited until after the holiday to apply for unemployment. It is a little disconcerting that claims rose in that environment. It suggests we could see another rise next week as those laggards rush into file claims this week. However, there could have been a rise in claims due to damages to businesses by Irene.

Jobless Claims Chart

The international trade deficit fell sharply to $44.8 billion from $53.1 billion. This is a lagging number from July so it was mostly ignored. Exports spiked +4.9% while imports declined -0.2%. This is much better than expectations and could add another half point to Q2 GDP when it is revised.

Consumer Credit rose unexpectedly to $12 billion in July while the prior month was revised to $11.3 billion. Revolving credit declined by -$3.4 billion while non-revolving credit rose significantly from $8.7 billion to $15.4 billion. This was the largest increase since early 2008. The spike in non-revolving was related to a jump in auto sales as the dealer inventory recovered from the break in the supply chain. Credit growth rose to an annualized pace of +6.8% over the last three months and the highest rate this year. The -$3.4 billion decline in revolving credit was the largest decline since January. Total outstanding credit rose to $2.45 trillion. This is $61 billion higher than last September but still $27 billion below the peak reached in 2008.

Oil inventories declined -4.0 million barrels as a result of the outage from the tropical storm Lee that shutdown over 60% of Gulf oil production last week. A new storm, Nate has spawned in the southern gulf and was initially expected to make landfall in northern Mexico and southern Texas. Over the last couple days it has started to increase in strength and the track is starting to point a little farther north. There is a possibility it could turn into the oil patch and with winds over 70 mph today it would be even more damaging than Lee. Oil prices are not likely to fall until the impact from Nate is known.

Also, tropical storm Maria continues to slid farther west and is now expected to cross Puerto Rico and brush Cuba on its way to Florida. This storm also has the potential to enter the Gulf although today that possibility is remote.

Tropical Storm Map

Nate Storm Track

Maria Storm Track

Wholesale Trade for July is the only report on the calendar for Friday. As a lagging report it will be mostly ignored.

Other factors weighing on the market today included the decision by the ECB to keep rates on hold at 1.5%. The problem was the lack of mention of any new monetary policy implementation. This was like the Bernanke speech. Lots of expectations and no big reveal of a new program. Jean-Claude Trichet also weighed on the market when he announced a cut in the GDP forecast for Europe. He said threats to growth in the euro region had worsened and inflation risks had eased.
He left the options open for banking officials but failed to suggest there would be any change in policy. He said the economy faces "particularly high uncertainty and intensified downside risks." He said the ECB remained ready to pump more cash into the market "if needed" and that lack of action depressed sentiment.

Gold prices recovered from their Wednesday dip to post a $50 gain today to $1852 and it is trading at $1863 overnight.

All eyes were on the president's speech coming up after the close. The president announced a $447 billion package of tax cuts and spending measures. The highlights of the package were as follows.

He proposed a $175 billion one-year extension and expansion of the employee payroll tax holiday that would have the tax rate to 3.1% in 2012.

He also proposed a $65 billion package to encourage small businesses to hire more workers. This would include cutting employer payroll taxes to 3.1% for the first $5 million of a company's wage bill in 2012. He also suggested a complete payroll tax holiday for increasing the size of payrolls by up to $50 million above the prior year either by hiring new workers or raising the salaries of existing workers.

The president said he was going to announce a plan to provide low cost refinancing to existing households. The holdup was discussions with Fannie and Freddie on how they could lower the barriers to refinancing. The number one barrier is credit quality. The new credit requirements are preventing the majority of existing homeowners from refinancing.

The president wants to continue the 100% expensing of corporate purchasers for 2012. That would cost another $5 billion.

He proposed $85 billion in aid for state and local governments. $35 billion for keeping teachers, police and firefighters in their jobs. $30 billion to modernize schools and community colleges. $15 billion to rehabilitate and refurbish vacant and foreclosed homes. Another $5 billion to help low income youths an adult workers and supporting year-round jobs for young people and subsidize work for unemployed low-income workers.

The president proposed $50 billion to invest in highways, transit, rail and aviation including upgrading airports and Air Traffic modernization.

He proposed $49 billion for a one year extension of long-term unemployment benefits currently about to expire for six million jobless Americans. Another $8 billion would be for tax credits for long-term unemployed.

The S&P futures declined sharply immediately after the speech but recovered quickly to slightly positive.

In stock news Google announced it was buying dining authority Zagat. They did this to compete with Open Table and Yelp. By adding Zagat to maps and reservations Google will attempt to differentiate themselves from the competition. This is part of Google's continuing plan to make more things available on mobile devices for an increasingly connected public. Zagat will be integrated into Google Places. There was no price mentioned but in 2008 Zagat had engaged Goldman Sachs to look for buyers in the $200 million range. Google had previously made a $500 million offer for Yelp but the deal talks collapsed. Open Table (OPEN) shares declined -10% after the Zagat deal was announced leaving them with a market cap of $1 billion.

Shares of Verisign (VRSN) declined nearly 12% in after hours after the CFO Brian Robbins unexpectedly resigned to pursue new opportunities. He will remain on through year-end to assist with a transition. The company also reaffirmed its 2011 financial outlook saying the resignation was not the result of any matters which would have an impact on the company.

After the bell Texas Instruments (TXN) warned earnings and revenue would be lower than expected for Q3. The company said it was seeing weaker demand "across a wide range of products, markets and customers." Revenue was cut to a mid range of $3.0 billion from prior forecasts averaging $3.55 billion. TXN said earnings would decline to 56-60 cents from prior estimates of 55-65 cents. The company statement said "the reductions are due to broadly lower demand across a wide range of products, markets and customers." They said demand began to decline in June with demand below seasonal norms. Shares only declined slightly in after hours.

Sunday is the ten-year anniversary of 9/11 and there is terrorist trouble again. The White House said there was a credible but unconfirmed threat ahead of the anniversary. Al-Qaeda has a history of repeating attacks on anniversaries. New York city and Washington were named as the potential sites for trouble next weekend. Officials said there was a high profile manhunt underway for 2-3 suspects. The government raised the threat level last week saying there was an increase in terrorist chatter but no specific threat. They raised awareness again today but continued to stress there was no confirmed threat. An initial report earlier in the week mentioned some rental trucks that had disappeared but officials said late Thursday those trucks had been recovered and were not a danger.

The S&P opened higher but came to a dead stop at our recurring nemesis of resistance at 1205. That was a challenge last time we moved higher in late August and apparently it is still a challenge. However, after yesterday's big gain I would have expect any further move higher ahead of Bernanke and Obama to be very difficult to achieve.

The dip today was lackluster and on low volume. Given the lack of any surprises in the president's speech I would suspect there will not be any enthusiasm for trading on Friday. Traders really have no reason to buy but there is no real reason to sell either. The potential for the Fed to act on Sept 20th is still real and that should keep the markets from falling off a cliff.

The odds are good we will trade in a range over the next couple weeks as we move into the earnings warning cycle. Events like the Texas Instruments warning will become more prevalent but overall corporate profits are still in good shape. There will be some unexpected warnings but we already knew semiconductor sales were weak.

The S&P could continue to trade between 1120-1220 until the Fed meeting. There is no compelling reason to trade other than a dip to the 1120 level or a breakout over 1220.

S&P Chart

The Dow did not quite make it to strong resistance at 11,500 with the high of the day at 11,477. The most positive point in the chart below is the pattern of higher lows. This suggests the range will continue to narrow as we get closer to the FOMC meeting. Support is now 11,000 with resistance at 11,500.

Dow Chart

The only real trend in the Nasdaq is extreme volatility as evidenced by the series of gap opens. We already knew semiconductor sales were weak so the TXN news was no surprise but there was always hope they would buck the trend. With September already showing extreme volatility for tech stocks the warning from TXN may make it less likely there will be enough buyers to produce a breakout over 2600 before the FOMC meeting. Like the other indexes I believe the Nasdaq will continue to trade in its recent range with a possible upward bias.

Nasdaq Chart

Russell Chart

I am neutral on the market for Friday. Even though summer is over there may still be some lingering vacations by traders. Volume should be light and direction dictated by Europe. The president's speech did not produce a direction in the overnight futures with them trading flat late tonight.

I would be in the camp of "why buy" for Friday. The weekend event risk is high and there is no trend other than range bound. I would look to buy the dips or buy a breakout over current resistance and avoid being cut to pieces in the range bound chop.